Promissory Notes

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PROMISSORY NOTE
$1,624,995.00 December 9, 1996
FOR VALUE RECEIVED, the undersigned, W. Lance Anderson, promises to
pay to the order of NovaStar Financial, Inc., a Maryland corporation (the
"Company"), the principal amount of One Million Six Hundred Twenty-Four Thousand
Nine Hundred Ninety-Five and 00/100 Dollars ($1,624,995.00) with interest
thereon at Eight Percent (8%) per annum. Certain capitalized and other terms
used herein shall have the meanings described in the Company's Private Placement
Memorandum dated October 15, 1996.
Interest will accrue during the first year and on December 9, 1997
will be added to principal due under the note. Thereafter, interest will be
payable quarterly.
The original principal amount of this Note will be divided into three
equal tranches of Five Hundred Forty-One Thousand Six Hundred Sixty-Five and
00/100 Dollars ($541,665.00). Payment of principal on each tranche will be
forgiven by the Company (and the interest accrued thereon during that quarter
will be immediately due and payable), if the following incentive performance
tests are achieved:
. During the first five fiscal periods after issuance of this Note:
- One tranche will be forgiven for each fiscal period as to
which the Company generates a total return to investors
purchasing Units in the Company's private placement equal to or
greater than 15%.
- At the end of each of the five fiscal periods, all remaining
tranches will be forgiven if the Company has generated a total
cumulative return to investors purchasing Units in the Company's
private placement (from date of initial issuance of the Note)
equal to or greater than 100%.
. For purposes of calculating the returns to such investors:
- The term "fiscal period" will refer to each of five periods,
the first commencing with the last closing of the Company's
private placement and ending on December 31, 1997, and each
succeeding fiscal period extending for twelve months and ending
on each December 31.
. The term "return" for each fiscal period will mean the sum of (on a
per Unit basis) (a) all cash dividends paid during (or declared with
respect to) such fiscal period per share of Preferred Stock (or per
share of Common Stock following conversion of the Preferred Stock
upon completion of a Qualified IPO), (b) any increase or decrease in
the
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price per share of Preferred Stock (or resulting Common Stock)
during such fiscal period, measured by using the price per Unit to
investors in the Company's private placement as the starting price
($15.00), and using the average public trading price during the last
90 days of each succeeding fiscal period for such succeeding
periods, and (c) any increase or decrease in the price per Warrant
during such fiscal period, determined in the same manner as in (b).
For purposes of the fiscal period 15% return test, the total return
for a given period will be equal to the sum of (a), (b) and (c)
during the period, and for purposes of the cumulative 100% return
test, the amounts in (a), (b) and (c) will all be measured from the
beginning of the first fiscal period. The amount of that "return"
will then be measured as a percentage of the investors' investment
in the Units (on a per Unit basis) without regard to timing of
receipt of dividends or timing of increases in per share or per
Warrant prices.
. If one of the incentive tests is met, the amount of loan forgiveness
for each tranche will be the principal amount of such tranche of the
Note. In addition, a loan will be made by the Company to the
undersigned in the amount of (i) personal tax liability resulting
from the forgiveness of debt, and (ii) interest accrued during the
first year on the forgiven tranches. The note will bear interest at
a floating market rate, will be secured by that proportionate number
of Units that had secured the forgiven tranche of the Note and will
mature upon the earlier of the sale of those Units (or the
underlying securities) or the termination of the officer's
employment with the Company.
. At the election of the undersigned, the Company shall pay the
premium on a term life insurance policy, the proceeds of which might
assist the undersigned's estate or legal representative to cover the
sums due under this Note, and the premium amount so advanced shall
be added to the principal amount due the Company.
Interest and principal shall be payable in full at maturity, which
maturity date is the earlier of (i) the sale of the underlying securities, (ii)
the termination of the undersigned's employment with the Company or (iii)
December 31, 2001.
This Note may be prepaid in full or in part at any time. Each payment
hereunder shall be applied by the holder, first, to the payment of interest when
due, and the balance to the repayment of the principal sum.
If default be made in the payment when due of principal and interest,
then the whole sum of principal and interest shall become immediately due and
payable at the option of the holder of this Note, without notice or demand.
Promisor shall pay all costs and expenses, including reasonable
attorneys' fees, incurred by the holder hereof in the collection of this Note.
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This Note is secured by the One Hundred Eight Thousand Three Hundred
Thirty-Three (108,333) Units purchased by the undersigned in the NovaStar
Financial, Inc. private placement which is closing on the date hereof.
____________________________________
W. Lance Anderson
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